Mexican telecommunications company América Móvil has long been a fan of issuing in Latin American currencies, having become the first foreign company to issue in the domestic bond market in Chile in 2009, for example. But though the company had sold Mexican peso-denominated bonds to international investors before last year, it had never been quite happy with the result.
The main issue, according to Carlos García Moreno, CFO since 2001, was illiquidity — a common affliction of local currency bonds.
But América Móvil — one of the largest corporates in LatAm and controlled by Carlos Slim — could afford to “think big”, says García Moreno. Its funding needs are large enough that it could effectively create a new instrument on its own and maintain sufficient liquidity. A US shelf allowed América Móvil the ability to be completely flexible with its dollar issues: so why couldn’t it do the same with Mexican peso bonds?
The company came up with the idea of registering bonds with the Comisión Nacional Bancaria y de Valores (CNBV) in Mexico as well as the SEC in the US, allowing the borrower to sell the deal to both domestic and international investors.
This is the beauty of the format, according to both the company CFO and DCM bankers who have worked on the deals, which went well from the start.
“The Mexican bank and securities commission was supportive and changed its procedures to back the idea,” says García Moreno. “It was not something that had been tried before anywhere, but the willingness of authorities showed that everyone had much to gain with this format.”
And so the títulos de crédito extranjeros were born. In November 2012, América Móvil attracted more than Ps50bn ($3.9bn) of orders for a Ps15bn ($1.17bn) note due 2022. The borrower paid 93bp over Mbonos — or a yield of 6.45% — for the bond led by Deutsche Bank, HSBC and Morgan Stanley.
Some 120 investors from 13 countries participated, with the majority of demand coming from the US (58%) and Latin America (33%), and some interest from the UK (8%) and Europe (1%).
Designed to trade
In its first step to ensure liquidity, América Móvil announced that it would try to tap the notes quarterly as it expected to raise Ps100bn ($7.8bn) through the programme in five years. The borrower duly re-opened the notes for a further Ps7.5bn in February 2013, pricing at 75bp over Mbonos — or a yield of 5.76%. BBVA Bancomer, Banamex (Citi’s Mexican subsidiary) and Credit Suisse were bookrunners on the tap.
While the first issue went much more to foreign investors, the re-opening was more balanced towards domestic investors.
“These balances will always change as pockets of appetite come and go, but for an ideal balance we would be half domestic investors and half international investors,” says García Moreno.
Although market conditions did not allow the company to re-open the bonds in the second quarter of 2013, Ps100bn is still the target.
The quest for liquidity went well beyond just opening the bonds up to more investors. The six bookunners on the programme are also hired as the borrower’s market-makers, and all have made commitments in terms of providing bid-offer prices in the secondary market.
But unlike the peso denominated government debt markets, the sale of these bonds does not use an auction but a bookbuilding process — another liquidity play that allows the borrower more control over allocations.
“To have liquidity you need more than just market-makers, you also need different types of investors,” says García Moreno. “If only pension funds hold the bonds there’ll be little trading anyway.”
Indeed, the order book in the first issue comprised 61% fund managers, 22% pension funds, 10% banks, 4% hedge funds, 2% retail and 1% insurers.
And América Móvil ensured its peso notes would contain further features to distinguish it from global local currency bonds
“Most global local currency bonds are denominated in the currency but settled in dollars, meaning traders have to agree on an exchange rate,” says García Moreno. “The créditos are denominated and payable in pesos, which makes for smoother trade. We can also deliver pesos across the world by way of Euroclear, which also means cleaner trading.”
For the borrower, the benefits are clear. The proportion of América Móvil’s peso denominated funding should rise from 25% to 35% by the end of the Ps100bn programme, says García Moreno.
“For us as a company it also made a lot of sense — a lot of our funding was in dollars but being swapped into pesos,” he says. “Raising funds directly in pesos is more cost-effective because we reduce swap costs, and it also avoids counterparty risk.”
It did not take long for a compatriot to follow. Media company Televisa, rated BBB+/BBB+, replicated the títulos de crédito extranjeros structure in May 2013 to sell Ps6.5bn of 7.25% of 30 year bonds at 99.757 to yield 7.27%, after attracting Ps40bn of demand. Citi, Deutsche Bank, HSBC and Morgan Stanley — all mandated on América Móvil’s programme — led the bond.
Televisa’s success came despite making no promises to regularly tap its new notes, and García Moreno believes there is scope for more companies without the firepower of América Móvil to copy the issuance.
“Some bankers have said to me that this product can only work for very large issuers, but I’m not so sure,” he says. “Because there is already an established international presence in the large Mbonos market and our bonds, it is not that much more work for investors to look at other credits.”
Indeed, Mexico certainly lends itself to the new product. In Mexico the market for fixed rate government securities — Mbonos — has developed “tremendously” since it started in 2000, says García Moreno. Since that year, the Mexican government has formed a well defined yield curve and liquid market, while the country is easy to access for investors in terms of FX and public debt markets.
Finally, “the peso has been a clean open currency for more than 20 years. Investors like the fact that they don’t have to be second-guessing the government or central bank”, the CFO adds.
The attraction of Mexican local currency markets meant nearly 60% of investors in Mbonos were foreign at the time of América Móvil’s first créditos issue in November 2012.
“We saw the significant appetite from international investors to take positions in the local currency — especially since 2009 — and thought we could come up with alternative to Mbonos that could offer diversification from government securities,” says García Moreno. “The 10 year part of the curve was where there was most overlap between international and domestic investors.”
But if the first transaction was designed to tap surging demand for Mexican local currency paper from international investors, the market environment since changed harshly. The sell-off in emerging market debt that followed the US Federal Reserve’s indications in May 2013 that it might start tapering its asset purchase programme included a severe widening in the Mbonos market, as well as a depreciation of the Mexican peso.
There had been no global local currency bond issues from Latin America since the sell-off began until the time EuroWeek spoke to García Moreno, and indeed the borrower could not tap the bonds in the second quarter of 2013 as it had promised.
Yet this had not disappointed investors, and market volatility should not dampen appetite for Mexican denominated debt in the long term.
“Although we had hoped to tap the bonds every quarter, you have to be sensible,” says García Moreno. “Investors realise there are exceptional moments in the market when it doesn’t make sense to aggravate the problem by bringing even more supply. We thought it was prudent not to issue and investors were happy, but we believe we will be able to return to regular issuance.”
Mexico’s strong fundamentals — with strong growth, stable politics, and low debt to GDP — mean its currency can still be an attractive investment for foreign buyers.
“Financial volatility clearly moves exchange rates, but without fundamental problems investors believe exchange rates will return to around normal,” says García Moreno. “And the investor community recognises that Mexico is in good shape and has a well-managed currency.”
The CFO believes more investors are seeking exposure to local currency, and that the lesson from the summer’s sell-off in local currency bonds is that investors must differentiate between currencies.
“Not all currencies are equal, and Mexico is one of the strongest,” he says.
Different maturities mulled
Approaching the end of the third quarter, América Móvil was considering another tap of its créditos. And reverse inquiry for shorter-dated paper means that this time it may look to adjust its plans slightly and issue five year bonds alongside the re-opening.
“Before the end of the third quarter we expect to tap the 10 year bonds, but we have had feedback that the market is also interested in five year paper, so we will open up this option and print at that maturity if it makes sense,” says García Moreno.
“When we began the programme we thought liquidity was the most important thing, so believed we would stick to the 10 year. Now we are thinking it would pay to have a yield curve with a five year and maybe eventually 15 or 20 year bonds.”
Nevertheless, the 10 year remains the priority, as it provides a “good anchor” for the bonds and is where most demand is found.